OPINION: Why Amazon’s tax bill isn't a scandal

Thursday

Feb 28, 2019 at 2:01 AM

It seems Amazon.com Inc. will be paying zero tax on its profits of roughly $10 billion in 2018. This has caused an outcry in certain quarters, but the complaints are misplaced.

The corporate tax code is riddled with loopholes and has plenty of misguided preferences - some of them new, thanks to the tax-reform measure passed in 2017. But the write-off Amazon used to help slash its tax bill isn't one of them. The online retail giant used a long-standing deduction granted to companies that reward their employees with stock-based compensation. This is a cost of labor, not that different from salaries or bonuses paid in cash. All of these are expenses incurred in running the business - and all should be deductible.

Underlining the point, Amazon employees were in turn taxed on the stock awards when they were paid out, generally at ordinary income tax rates. The corporate tax rate now stands at 21 percent, and the top income tax rate is 37 percent - so the government is actually gathering more revenue this way than if the stock awards hadn't been deducted against the profits.

Granted, there's a complication worth noting - though not one that reflects badly on Amazon, or for that matter on the tax code, flawed as it may be in other respects. Companies follow financial accounting standards for their financial statements, and use tax accounting standards when calculating their tax liabilities. For stock-based compensation, which can be awarded at one time and then paid out at a later date, the expense assigned under each set of standards often differs. For companies like Amazon, whose stock price has skyrocketed, the tax deductions for stock-based compensation are generally much bigger than the expense according to the financial accounting.

The tax accounting isn't wrong, because it's based on what the awards are worth when they're paid out, but the seeming discrepancy with the financial accounting treatment is troubling. Some lawmakers have said the tax write-off should be limited to match the financial accounting expense -- but that would fail to reflect the value of the awards when they were paid, and limit deductions with no clear rationale for doing so. It might also induce companies to monkey with their financial statements and overstate their expenses. If full consistency is the goal, it would be better to achieve it the other way - by looking at the methods used to estimate values for stock awards.

In the end, though, isn't it just wrong for a company like Amazon, whose stock has appreciated so much, to be entitled to a bigger write-off than a less profitable company? How can "more profits, less tax" make sense? The answer is simple: It make sense when the company uses grants of stock to let its employees share in its success - and pay more tax at the individual level as a result.

President Donald Trump's tax overhaul was a mess, to be sure. It purported to streamline the corporate tax code and on the whole did the opposite. But the so-called scandal of Amazon's taxes has nothing to do with it, and isn't in fact a scandal.

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